One of the biggest challenges for young people wanting to buy their own home, is saving sufficient funds for a deposit. It can take years and sometimes be a real battle in keeping up with rising prices.
An increasingly popular means of enabling a young first home buyer to make a purchase while having a shortfall in the deposit is through a system, known as ‘family pledging’.
‘Family pledging’ is used where the young person earns enough to cover the mortgage repayments, but can’t raise the full 20% deposit or there’s a shortfall in the amount needed.
The process entails the parents temporarily ‘pledging’ the deposit against a percentage of their home equity.
For example, if the property’s purchase price was $400,000, 20% or $80,000 would be pledged.
In time, when the home has appreciated and some of the loan repaid so the young person’s equity in the home has increased, the property would be re-valued, and if equity was above the $80,000, the parents would be released from their commitment.
The home is solely in the children’s names, as they are the applicant and the parents become the guarantors.
Apart from enabling a young person to enter the property market before a deposit has been accumulated, it removes the need for the payment of mortgage insurance which is required if more than 80% of the purchase price is borrowed.
Important to know
- The bank’s primary security will be the home being purchased, but it will take a mortgage over the parents’ property as extra security.
- The parental guarantee lasts until the child’s equity surpasses the guaranteed amount. The parental guarantee can then be removed.
- There are risks in being guarantors that parents need to be aware of so they need to understand the ramifications if things don’t work out.
With respect to the risks, parents need to ensure the young person will be able to meet the loan payments. Income protection and trauma insurance should be obtained to avert a crisis.
It is important to understand that if the child was to default the loan, the bank could sell the property being purchased to repay the debt. If there was a shortfall between the net sale price and what was owed to the bank, the bank could recover the shortfall from the parents.
A point to note:
Not all banks provide loans with this system and some have different criteria for establishment. Ballast can help find the best package for your family’s situation.
Contact Ballast Lending Central – firstname.lastname@example.org